1 Business, Government, and Regulation Business and Society: Ethics and Stakeholder Management, 7e Carroll & Buchholtz Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved Prepared by Deborah Baker Texas Christian University Chapter 11

2 Quote of the Day  Democracy is an awful way to run a country, but it's the best system we have. Winston Churchill

3 Government’s Role in Influencing Business 1.Prescribes the rules of the game for business. 2.Purchases business’ products and services. 3.Uses its contracting power to get business to do things it wants. 4.Is a major promoter and subsidizer of business. 5.Is the owner of vast quantities of productive equipment and wealth. 6.Is an architect of economic growth. 7.Is a financier. 8.Is the protector of various interests in society against business exploitation. 9.Directly manages large areas of private business. 10.Is the repository of the social conscience and redistributes resources to meet social objectives.

4  What should be the respective roles of business and government in our socioeconomic system?  Given all of the tasks that must be accomplished to make our society work, which of these tasks should be handled by the government and which should be handled by business?  How much autonomy are we willing to allow business?  Calvin Coolidge, 1920’s ….."the business of America is business." Roles of Government and Business

5 Adam Smith  Capitalism – Free Trade  Adam Smith has sometimes been caricatured as someone who saw no role for government in economic life. In fact, he believed that government had an important role to play. Like most modern believers in free markets, Smith believed that the government should enforce contracts and grant patents and copyrights to encourage inventions and new ideas. He also thought that the government should provide public works, such as roads and bridges, that, he assumed, would not be worthwhile for individuals to provide. Interestingly, though, he wanted the users of such public works to pay in proportion to their use. "Biography of Adam Smith", The Concise Encyclopedia of Economics. Liberty Fund, Inc. Ed. David R. Henderson. Library of Economics and Liberty. 11 February 2008.

6 Business BeliefsGovernment Beliefs  Individualistic ethic  Maximizes concession to self-interest  Minimizes the load of obligations society imposes on the individual (personal freedom)  Emphasizes inequalities of individuals  Collectivistic ethic  Subordinates individual goals and self-interest to group goals and group interests  Maximizes obligations assumed by the individual and discouraging self-interest  Emphasizes equality of individuals Clash of Ethical Systems Figure 11-1

7 Social, Technological, and Value Changes Major Changes National society Communal society Entitlements Quality of life Societal Value Changes Youth movement Consumer protection movement Ecology movement Civil rights movement Women’s movement Egalitarian movement

8 Interaction Among Business, Government, and the Public Lobbying Regulations and Other Forms of Persuasion Advertising Public Relations Political Process Voting Interest Groups Contributions Public Business Government Interest groups Not buying products Protests Politicking Political influence Figure 11-2

9  Government / Business Relationship Lobbying  Public / Government Relationship Voting Electing officials  Business / Public Relationship Advertising Public Relations Other forms of communication Interaction Among Business, Government, and the Public

10 Government’s Nonregulatory Influence on Business Two Major Nonregulatory Issues Industrial Policy Privatization

11 Industrial Policy Any selective government measurethat prevents or promotes changesin the structure of an economy.

12 Industrial Policy Adjusters Targeters Central planners Accelerationists Bankers Schools of Thought

13  Decline of U.S. competitiveness  Use by other world governments  Ad hoc industrial policy  Reduces market efficiency  Promotes political decisions  Foreign success variable  Various interventions create an industrial policy by default Industrial Policy Arguments ForArguments Against

14 Example: Industrial Policy in S. Korea The healthcare biotechnology sector in South Korea is competitive with that in many developed countries. The government has ploughed funding into both basic and applied research. Significantly, it has also recently started financing mechanisms for technology transfer from the country's excellent academic institutions to the private sector. Recent progress has also been made in providing a legal framework that gives greater intellectual property (IP) protection to companies, encouraging the growth of IP-dependent biotech enterprises. In tandem, decentralization and greater private investment in the sector is also fueling startup activity. With a highly educated population, and debates about embryonic stem (ES) cell research prominent in the national media, the Korean public is relatively knowledgeable about healthcare biotechnology and is optimistic about its promise for improving health and well being.

15 Privatization The process of “turning over to”the private sector some functionthat was previously handledby government.

16  Major employer  Standard setter  Largest purchaser  Use of Subsidies  Transfer payments  Major competitor  Loans and loan guarantees  Taxation  Monetary policy  Moral suasion Other Nonregulatory Government Influences

17 Government’s Regulatory Influence on Business Factors to Consider Regarding Government Regulation  Fair treatment  Protection  Scope  Cost  Burden

18 1. Has decision-making authority 2. Establishes standards or guidelines conferring benefits and imposing restrictions on business conduct 3. Operates principally in the sphere of domestic business activity 4. Has its head and / or members appointed by the president (generally subject to Senate confirmation) 5. Has its legal procedures generally governed by the Administrative Procedures Act A Federal Regulatory Agency…

19 Reasons for Regulation Controls negative externalities Achieves social goals Controls excess profits Controls natural monopolies Controls excessive competition

20 Types of Regulation Civil Aeronautics Board Federal Communications Commission Interstate Commerce Commission Economic Regulation Major costs of economic regulation are for: 1. Finance and banking 2. Industry-specific regulation 3. General business

21 Types of Regulation Occupational Safety and Health Administration Equal Employment Opportunity Commission Environmental Protection Agency Social Regulation

22 Economic RegulationsSocial Regulations FocusMarket conditions; economic variables People in roles as employees, consumers and citizens Affected Industries Selected (railroads, aeronautics, communications) Virtually all industries ExamplesCAB FCC EEOC, OSHA, CPSC, EPA Current Trend From regulation to deregulation Stable Comparison of Economic and Social Regulation Figure 11-3

23 Benefits of Regulation  Fair treatment of employees  Safer working conditions  Safer products  Cleaner air and water  ENFORCEMENT? PG. 353 “Ethics in Practice”

24  Direct costs  Indirect costs  Induced costs Effects 1.Innovation may be affected. 2.New investments in plant and equipment may be affected. 3.Small business may be adversely affected. Costs of Regulation

25 Regulatory Spending in the U.S. Figure 11-5

26 Deregulation Purpose Intended to increase competition with the expected benefits of greater efficiency, lower prices, and enhanced innovation. Dilemma Many competitors are unable to compete with the dominant firms. Must enhance competition without sacrificing applicable social regulations (e.g., health and safety requirements).

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28 Industries Affected by Deregulation  Trucking  Telecommunications  Financial Services  Electric Utilities